China’s President Xi
Jinping and German Chancellor Angela Merkel pledged to work together
more closely on a range of issues. Japan and the European Union
agreed a free trade pact to create the world’s biggest open economic
area and signal resistance to what they see as President Trump’s
protectionist turn.

German chancellor Merkel, who is hosting the summit,
wants to unite world leaders on environmental goals, but will be
careful not to mention the words “climate change” around the US
president. Japanese Prime Minister Shinzo Abe urged the G20 states to
continue working together on climate protection, after Trump pulled the
United States out of the 2015 Paris agreement on climate change policy.

France
announced it will end the sale of gasoline and diesel vehicles by 2040
and become carbon neutral 10 years later. Earlier today, Trump delivered
a speech in Warsaw before heading to the summit. Tomorrow, Trump meets
with Russian President Putin.

The G20 is the G19 this year.
Brazil is absent. Brazilian President Michele Temer faces criminal
corruption charges. Meanwhile, protesters are capturing the spotlight.
There are 20,000 riot police in Hamburg; six times more protesters. What
are they protesting? Well, it’s a mixed bag of issues but it seems to
include globalization, a lack of action on climate change, war,
inequality, refugees, and authoritarianism in general.

Germany, the host of the G19, saw its bond yields climb to the highest levels in 18 months. The yield on German 10-year bunds
rose nine basis points to 0.56 percent; part of a drop in global
government bonds that spread to the US and pushed the yield on 10-year
Treasury notes to the highest level since May.

Bonds across Europe fell
after the results of a French debt auction showed a drop in excess
demand for 30-year securities. Trading volumes in bund futures contracts
jumped after the auction results were announced, sparking the surge in
yields. The Stoxx Europe 600 Index fell 0.7 percent as bond yields rose,
bringing its decline since mid-May to about 4 percent. Eurozone stocks
were hot a couple of months ago, now, not so much.

Hedge funds that built up bullish long-end Treasury wagers to the
highest outright level since 2008 are rushing for the exit. DoubleLine
Capital Chief Executive Officer Jeffrey Gundlach
says the recent selloff is a sign of more pain to come for Treasury
bulls.

With a Federal Reserve seemingly committed to raising interest
rates a third time this year and speculation the European Central Bank
could announce a tapering of bond purchases by the end of the year, the
fundamentals aren’t encouraging. As yields are now approaching key
technical marks that could trigger a fresh flush out of long-end bulls,
the risk is building that Treasury yields go even higher.

Tomorrow we will receive the Labor Department’s monthly non-farm payroll report. Today we had a sampling of predictive data.

The ADP
National Employment Report showed private sector payrolls increased by
158,000 jobs last month, stepping down from the 230,000 positions
created in May and below expectations for a gain of 185,000.

While the
ADP report has a spotty record predicting non-farm payrolls, June’s
modest job gains together with the modest rise in first-time
applications for jobless benefits and cooling services sector employment
pose a downside risk to the government’s June jobs report.

Last month,
for example, ADP recorded 253,000 private-sector job gains while the
Labor Department tallied just 147,000 private jobs and 138,000 total
additions, after subtracting out government job losses.

Outplacement consultancy firm Challenger, Gray & Christmas reports
the number of planned layoffs fell in June to its lowest level of the
year as employers opted to hold onto existing jobs in a tight labor
market where skilled laborers are harder to find.

Meanwhile, initial claims for state unemployment benefits increased
4,000 to a seasonally adjusted 248,000 for the week ended July 1. It was
the third straight weekly increase in claims. Still, it was the 122nd
straight week that claims remained below 300,000, a threshold associated
with a healthy labor market.

A report from the Institute for Supply Management
showed its non-manufacturing sector index rose half a point to a
reading of 57.4 in June. A reading above 50 indicates expansion in the
vast services sector. Industries reported an increase in new orders, but
said employment growth had slowed.

A report from the Commerce Department showed the trade deficit
fell 2.3 percent to $46.5 billion in May. When adjusted for inflation,
the trade deficit narrowed to $62.8 billion from $63.8 billion in April.
Real goods exports surged to an all-time high in May, propelled by
record high petroleum exports.

Still, the real trade deficit averaged
$63.3 billion in April and May, above the first quarter’s average of
$62.2 billion. That suggests trade will be a drag on gross domestic
product in the second quarter after contributing 0.23 percentage point
to the economy’s 1.4 percent annualized growth pace in the first three
months of the year.

As the US economy enters its ninth year of expansion this month, many Americans feel the recovery has been incomplete
— and the numbers back them up. Five states — Arizona, Connecticut,
Mississippi, Nevada and Wyoming — still haven’t regained their levels of
gross domestic product from before the financial crisis, more than five
years after the country hit that milestone.

Arizona’s GDP is
still 0.3% below the pre-recession peak. Home prices in Arizona are
still almost 11% lower than 2007 levels. Eight states are below
pre-recession levels of employment. And 15 have home prices that have yet
to rebound fully.

Eighteen states and the District of Columbia sued the US Education Department
and Secretary Betsy DeVos over the recent suspension of rules that
would have swiftly canceled student-loan debt of people defrauded by
Corinthian Colleges Inc and other for-profit schools.

The suits claim
the department broke federal law in announcing the delay with limited
public notice and opportunity to comment. They said the department and
DeVos were using the pending litigation as “a mere pretext” to repeal
the rules and replace them with one that “will remove or dilute student
rights and protections.”

DeVos said she wanted to pause the acceleration
of the debt cancellation process because it “puts taxpayers on the hook
for significant costs.” She also said a delay was needed while current
litigation in California over the rules, works its way through the legal
system. Consumer groups Public Citizen and Project on Predatory Student
Lending sued to remove the delay as well.

The Home Shopping Network is having a sale. The buyer is QVC, the
shopping channel owned by Liberty Interactive is buying Home Shopping
Network for $2.6 billion. A combined QVC-HSN
ranks as the No. 6 U.S. online retailer ($7.5 billion eCommerce sale in
2016), dwarfed by Amazon ($123.8 billion). QVC and HSN will continue to
operate as individual brands.

We’re waiting for an announce from Berkshire Hathaway.
Berkshire Hathaway’s energy business is close to a deal to acquire
Oncor, the electric-utility giant based in Texas. Oncor, one of the
largest utility companies in the US, says it serves 10 million customers
across Texas. It earned $935 million in operating revenues and $73
million in net income in the quarter ended March 31.

We just had a vote in Illinois.
A financial showdown, more than two years in the making, went to a vote
this afternoon in the Illinois House as Democrats enacted a $36 billion
spending plan fueled by a 32 percent income tax increase over the
Republican governor’s objection.

Votes to override Gov. Bruce Rauner’s
vetoes of the budget package give Illinois its first annual budget since
2015 and spell the end of the nation’s longest fiscal stalemate since
at least the Great Depression. The standoff entered a third fiscal year
on July 1. Credit-rating houses had threatened to downgrade the state’s
creditworthiness to “junk,” signaling to investors that buying state
debt is a highly speculative venture.

Yesterday, Moody’s Investors
Service, put Illinois under review for a downgrade even with the new
budget. Moody’s said that while lawmakers have made progress, the House
budget does not address the state’s massively underfunded pensions or do
enough to pay down bills.

The resolution to the fiscal standoff, which
emerged from the Democrat-led legislature over the last several days,
triggered a rally in Illinois bond prices by signaling that elected
leaders are beginning to tackle the government’s long-building financial
strains. Without a full-year budget for the past two years, Illinois
continued to run up deficits, leaving it with dwindling reserves, a
record pile of unpaid bills and increasing obligations to its
underfunded employee pension system.

Thirty-three of the 50 U.S. states reported revenues that came in below
projections in fiscal year 2017, the highest number of states since the
recession decimated budgets in 2010.

Microsoft announced
a major reorganization that will include up to 3,000 layoffs, largely
in sales. The job cuts amount to less than 10 percent of the company’s
total sales force, and about 75 percent of them will be outside the US.
Reports from last week suggested this was going to happen and that
Microsoft was going to specifically focus on how it sells its
cloud-services product, Azure, which has been booming in recent
quarters.

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